Mark-to-Market's Irrational Result

Updated Feb. 17, 2009 12:01 a.m. ET

Regarding Holman Jenkins's "The Unmentionable Bank Solution" (Business World, Feb. 11): As a compromise for the benefit of banks, regulators and accounting purists, why not move the mark-to-market disclosure for banks from the financial statements to the notes to the financial statements (the opposite, if you will, of what was done to options expensing through FAS 123).

The effect would be to give financial analysts the information they need to assess a bank's prospects without impacting bank regulatory capital. This could be done in the spirit of facilitating an orderly but entirely necessary consolidation of the banking system and not for the purpose of keeping inherently insolvent banks afloat.

John EmrichLong Grove, Ill.

Let me provide one example of the "irrationality" of mark-to-market. One year ago, an appraiser valued an old house on a half-acre of land close to the beach in Hawaii at $2 million. I tore down the house and built a nicer, bigger one at a cost of $850,000. Today, the bank appraisal comes in at $1.5 million. Why? Because the bank, to be "conservative," now only accepts appraisals done within the past three months. Nothing has sold on that beach for the past three months, so the closest comparable the appraiser can find is a similar property farther inland, where there is no beach premium. Now the bank must report a lower loan-to-value on its books for my loan, and I cannot sell the house for what it is worth.

So now the waiting game begins for the market to come back. The trouble is, if everyone waits, then the market will continue to spiral down like Japan's real estate market in the 1990s. Mark-to-market is indeed mark-to-madness.

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